What is IR35?
First introduced in 2000. The intention of IR35 is to reduce tax avoidance by contractors. These are individuals the HMRC believes are “disguised employees”. People who work in a similar way to full-time employees but bill for their services via their own limited companies.
The majority of these contractual relationships are genuine. There are plenty of sole trader limited companies operating in the UK. It’s not uncommon for organisations to pay people in this way; to avoid employers’ National Insurance contributions or the provision of employment benefits.
The IR35 rules exist to ensure that a contractor. Doing the same work as an employee pays similar tax to an employee. A HMRC inspector determines if IR35 applies to contractors case by case. This is based on actual working practices, and not an employment contract.
The contractor must prove there is no employment relationship. This determines whether they are ‘inside’ or ‘outside’ of IR35. As a rule of thumb, IR35 won’t apply if the contract is for the services you provide instead of employment.
If the contractor passes the test, then they are ‘outside’ of the rules. Invoicing and paying themselves through their own limited company contines. If deemed ‘inside’, the HMRC can declare that it’s an employment relationship. Tax and National Insurance will be deducted from earnings, and the liability for any missing tax lies with them.
In the public sector
Originally, the contractor declared employment status and not the hiring organisation. In 2017, the rules changed for the public sector. Proof of self-employed status shifted from the contractor to the hirer. Allowing for the contractor to be taxed and pay NI as an employee. While still not receiving employee benefits.
These changes made hiring contractors a riskier business. The hirer is fined for the incorrect identification of a contractor as an ‘outsider’. To avoid this some public bodies have ceased the use of limited company contractors. These bodies include the HMRC, NHS and the MOD.
In the private sector
The Government argues that contractors paying less tax than employees is unfair. The IR35 reforms already implemented in the public sector will cover private sector contracts in April 2020.
There are concerns that organisations will become wary about contracting out work. Or that contractors will need to work and operate through PAYE umbrella companies.
Businesses and contractors should start preparing for this change as soon as possible.
How to calculate IR35 payment
If it’s deemed that IR35 does apply to your contract, then you will be responsible for paying outstanding income tax and National Insurance contributions. The HMRC can go back at least six years to determine whether IR35 applies to previous work. The HMRC can request that you pay any necessary penalties and interest.
How to prepare
Contact us for a detailed review of your business practices. And we can then establish whether IR35 applies.